Discount pricing

Journal article

We investigate the practice of framing a price as a discount from an earlier price, with information such as "was USD200, now USD100". We discuss two reasons why a discounted price- rather than a merely low price- can make a consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, when a seller with limited stock runs a clearance sale, later consumers infer that unsold stock has higher expected quality when its initial price was higher. We also suggest a behavioural explanation, which is that consumers with reference-dependence preferences are more likely to buy if they perceive the price as a bargain relative to the earlier price. Discount pricing is therefore an effective marketing technique, and a seller may wish to deceive potential customers by offering a false discount. The welfare effects of regulation to prevent fictitious pricing are subtle, possible with unintended consequences, partly depending on whether consumers are sophisticated or naive.

Authors: Armstrong, M; Chen, Y

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Wiley
• Journal: Economic Inquiry
• Volume: 58
• Issue: 4
• Pages: 1614-1627
• Publication date: 2019-03-05
• Acceptance date: 2019-01-25
• DOI: 10.1111/ecin.12774
• EISSN: 1465-7295
• ISSN: 0095-2583
• Language: English
• Keywords: consumer protection; fictitious pricing; reference dependence; false advertising; sales tactics